Icon Offshore Bhd is coming to the market at what appears to be toppish valuations.
At an indicative initial public offering (IPO) price of RM1.85 a share, the oil and gas support services provider will be listed at a price-to-earnings multiple (PE) of 18 to 19 times its estimated 2014 earnings – a premium over the sector average of 13 times.
Its peers such as Perdana Petroleum Bhd and Alam Maritim Resources Bhd are currently trading at 13 times their forecast earnings this year, and between 11 and 12 times their expected profit in 2015, Bloomberg data showed.
On a historical basis, the listing price is a steep 24 times the company's earnings per share of 7.61 sen last year. Its 2015 valuations are more reasonable at 13 to 15 times earnings.
At these levels, the offshore support vessel (OSV) owner-operator is commanding valuations that are closer to the large cap, integrated players like Bumi Armada Bhd and SapuraKencana Petroleum Bhd.
That hasn't deterred investors. The IPO, now two years in the making, snagged a total of nine cornerstone investors, including Tan Sri Chua Ma Yu, government-linked funds Lembaga Tabung Haji and Permodalan Nasional Bhd, and the usual cadre of fund management firms, such as Hwang Investment Management Bhd, Maybank Asset Management Sdn Bhd and Nomura Asset Management Sdn Bhd.
They will be subjected to a six-month lock-up period that prohibits them from selling shares, according to the prospectus released last Friday.
The overwhelming support for Icon Offshore – its cornerstone investors will mop up a little over half of the shares on offer – underlines the fact that Malaysian oil and gas stocks remain a hot favourite with investors, despite some concern that the market could be coming off slightly.
Icon Offshore is selling 510.77 million shares via the listing, from which most of the proceeds at RM534.69mil will go to its existing shareholders.
The offer for sale portion stands at 289.02 million shares. Icon Offshore itself plans to issue 221.75 million new shares, raising RM410.23mil. The funds will chiefly be used to expand its OSV fleet and repay bank borrowings.
State-owned private equity firm Ekuiti Nasional Bhd (Ekuinas), Icon Offshore’s largest shareholder with an 88.13% stake, will pare down its interest to 41% if the over-allotment option is exercised, pocketing RM523.59mil in gross proceeds.
Icon Offshore’s key management will retain a 6.2% stake.
At RM1.85 apiece, the listing, one of the largest so far this year, is set to raise RM944.92mil, giving Icon Offshore a market capitalisation of RM2.18bil upon its debut, scheduled for June 25.
The group has come a long way from owning just two vessels in 2005.
With 32 ships in its fleet now, Icon Offshore can lay claim to being the No. 1 pure OSV provider in Malaysia and one of the largest in Southeast Asia.
It has six vessels under construction and is in negotiations to build one more, bringing its fleet count to 39 by the first quarter of 2016.
OSVs are used to transport people, goods, supplies and equipment to offshore oil rigs or platforms.
Icon Offshore was born of a merger between Tanjung Offshore Bhd’s OSV arm and Dr Jamal Yusof’s Omni Petromaritime Sdn Bhd in a deal put together by Ekuinas in 2012.
The listing of Icon Offshore will be the first in Ekuinas’ stable.
Icon co-founder and CEO Jamal, who has spent almost two decades in the industry, tells StarBizWeek that he started out in the business as a ship broker leasing vessels to Petroliam Nasional Bhd (Petronas).
Dental surgeon-turned entrepreneur Jamal, also the current president of industry body OSV Malaysia, recalls the time when his then-fledgling company was trying to secure bank financing for a vessel purchase.
“It was a chicken and egg situation. Banks won’t give you the money for the vessel without a contract, and clients won’t give you a contract without a vessel,” he quips.
Armed with funds from the listing, Icon Offshore plans to spend RM493mil in capital expenditure within the next two years, of which RM461mil has been earmarked for the seven vessels.
By early-2016, its fleet will consist of 26 anchor-handling tugs (AHT) and anchor handling tug supply vessels (AHTS), four straight supply vessels, two utility vessels, three platform supply vessels (PSV), three accommodation work boats (AWB) and one fast crew boat.
According to the prospectus, Icon Offshore owns one of the youngest fleet in the region with an average age of five years, versus the Southeast Asia average of 11 years.
The bulk of its fleet is locked into time charters, which typically last 12 months or longer. Its average utilisation has dipped from 88% in 2011 to 84% last year.
Some 70% of its jobs come from Petronas, which the firm is hoping to reduce by expanding into the region.
Although Icon Offshore has yet to secure charters for all of its newbuild vessels, Jamal says there is no shortage of jobs for local OSV players.
“We are in talks with potential clients not only in Malaysia but also regionally. Indonesia, Vietnam and Brunei are all ramping up their exploration and production (E&P) activity ,” he says.
While oilfields in shallow water will largely remain Icon Offshore’s bread and butter, the group already has a toehold in the more challenging deepwater segment, which is poised to grow as shallow water reserves dwindle, according to Jamal.
Come 2016, the group will have taken delivery of seven newbuild vessels with deepwater capability, comprising the AWB, PSV, and mid-sized AHTS.
Deepwater oilfields, with depths exceeding 500m, require more powerful ships.
AHT and AHTS servicing these fields must be equipped with an engine capacity of over 10,000 brake horsepower (bhp), while deepwater PSVs need a cargo carrying capacity of over 3,500 deadweight tonne.
But Jamal points out that shallow water activity will continue to dominate E&P spending in the near term.
“Production in shallow water costs about US$40-US$60 per barrel, depending on the age of the field. Oil prices have topped US$100 per barrel for the past year. Shallow water production is still a cash cow for E&P players.”
He expects daily charter rates for local OSV companies to maintain their current levels after recovering in 2012 and improving strongly last year.
“This is a cyclical industry and it comes in waves of seven years or more. So we will focus on assets which yield long-term returns,” Jamal says.
A UOBKayHian analyst opines that the local OSV market could be at the top end of the cycle, although he doesn’t see a downtrend anytime soon.
“Petronas had dished out most of the big OSV jobs last year, but I don’t discount the possibility of more projects.
“There is still room for growth, especially with marginal fields and other offshore developments in the pipeline,” he explains.
The analyst points out that day rates had peaked at the US$2-US$2.20 per bhp range earlier this year and are currently hovering at around US$1.80 per bhp.
For his part, Jamal concedes that the warning from Petronas president and CEO Tan Sri Shamsul Azhar Abbas in March that charter rates were heading south had stoked concern, but he does not think the broader market is experiencing a slowdown.
“There is a huge overhang from the older vessels that need to be replaced. Meanwhile, yards in China are reducing their production of newbuild OSVs.
“The number of newbuild AHTS is set to come down over the next few years,” Jamal notes.
In Icon Offshore’s case, 90% of its fleet is serving out three to five year retainer contracts, providing a buffer to swings in the market.
Its debt load, which is a staggering RM1.1bil, will shrink to RM743.65mil once some of it is paid off with the listing proceeds.
The company's net gearing ratio of 2.78 times will also drop to 0.65 times post-IPO. Notably, its current borrowings are more than double its firm orderbook of RM502.4mil.
Icon Offshore’s total orderbook, inclusive of optional extensions, is valued at RM700.1mil.
The firm posted net profit and sales of RM89.57mil and RM334.86mil last year. Its profit after tax margin had improved to 26.7% as at last year from 19.6% in 2011.
Icon Offshore is expected to match its historical growth rates of double-digit growth, says Jamal.
Its net profit and revenue jumped by a compound annual growth rate of 41.9% and 21.6%, respectively, in the three-year period up to 2013.
Be that as it may, the fact that Icon Offshore had geared up to almost three times its shareholder’s funds in a bid to expand could give some investors pause.
To this, Jamal says the only way to grow is to own the assets, and that most of its debt was incurred for vessel financing.
The listing, he adds, will help Icon Offshore build a warchest to weather the ups and downs of the market.
“Icon Offshore will stay focused on pure OSV operations (marine transport). We know who we are and intend to stay who we are.”